Harley-Davidson (HOG)

American motorcycle manufacturing company Harley-Davidson (NYSE:HOG) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 23.2% year on year to $1.33 billion. Its GAAP profit of $1.07 per share was 39.1% above analysts’ consensus estimates.

Company Overview

Founded in 1903, Harley-Davidson (NYSE:HOG) is an American motorcycle manufacturer known for its heavyweight motorcycles designed for cruising on highways.

Leisure products cover a wide range of goods in the consumer discretionary sector. Maintaining a strong brand is key to success, and those who differentiate themselves will enjoy customer loyalty and pricing power while those who don’t may find themselves in precarious positions due to the non-essential nature of their offerings.

Competitors in the recreational vehicle industry include Polaris (NYSE:PII), Honda (NYSE:HMC), and Arcimoto (NASDAQ:FUV).

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Harley-Davidson struggled to consistently generate demand over the last five years as its sales dropped at a 1.9% annual rate. This wasn’t a great result and is a sign of lacking business quality.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Harley-Davidson’s recent performance shows its demand remained suppressed as its revenue has declined by 11% annually over the last two years.

We can better understand the company’s revenue dynamics by analyzing its number of motorcycles sold, which reached 38,600 in the latest quarter. Over the last two years, Harley-Davidson’s motorcycles sold averaged 20.1% year-on-year declines. Because this number is lower than its revenue growth during the same period, we can see the company’s monetization has risen.

This quarter, Harley-Davidson missed Wall Street’s estimates and reported a rather uninspiring 23.2% year-on-year revenue decline, generating $1.33 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 7.2% over the next 12 months. While this projection implies its newer products and services will catalyze better top-line performance, it is still below the sector average.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Harley-Davidson’s operating margin has shrunk over the last 12 months and averaged 9.3% over the last two years. The company’s profitability was mediocre for a consumer discretionary business and shows it couldn’t pass its higher operating expenses onto its customers.

This quarter, Harley-Davidson generated an operating profit margin of 12.1%, down 3.1 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Harley-Davidson’s EPS grew at a weak 2.4% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.9% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

In Q1, Harley-Davidson reported EPS at $1.07, down from $1.72 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Harley-Davidson’s full-year EPS of $2.68 to grow 26.1%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Harley-Davidson has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 14.4% over the last two years, better than the broader consumer discretionary sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Harley-Davidson’s free cash flow clocked in at $111.6 million in Q1, equivalent to a 8.4% margin. This result was good as its margin was 5.1 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Harley-Davidson’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 19.2% for the last 12 months will decrease to 9.7%.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Harley-Davidson’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 16.7%, slightly better than typical consumer discretionary business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Harley-Davidson’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Harley-Davidson’s $7.48 billion of debt exceeds the $1.93 billion of cash on its balance sheet. Furthermore, its 14× net-debt-to-EBITDA ratio (based on its EBITDA of $405.3 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Harley-Davidson could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Harley-Davidson can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We were impressed by how significantly Harley-Davidson blew past analysts’ EPS expectations this quarter. On the other hand, its revenue missed as it sold fewer motorcycles than estimated. Overall, we think this was a mixed quarter. The stock traded up 2.4% to $22.92 immediately after reporting.

Updated: May 22, 2025 at 10:05 PM EDT

Before deciding whether to buy Harley-Davidson or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We see the value of companies helping consumers, but in the case of Harley-Davidson, we’re out. First off, its revenue has declined over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its number of motorcycles sold has disappointed. On top of that, its Forecasted free cash flow margin suggests the company will ramp up its investments next year.

Harley-Davidson’s P/E ratio based on the next 12 months is 7.5x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $28.62 on the company (compared to the current share price of $24.76).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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